“Lifestyle that we never knew. Go at a reverend for the revenue.”
– Kendrick Lamar a.k.a. Business, “Money Trees“
How do you determine how much your product or service will make? The two common revenue models are:
- Top-down: percentage of the Total Available Market (TAM)
- Bottoms-up: price x # customers x growth rate
Building a revenue model is easy; passing the smell test is difficult. I have seen many models that demonstrate growth to $500M in revenue over five years, and it is just not credible. An ideal venture-backed model should be:
In today’s world of consumer internet and enterprise IT, this model should lose no more than $10-$15M over the four-year period. Every market varies, and many, such as SaaS, are measured by monthly recurring revenue (MRR) and not by GAAP recognized revenues.